Brazil Central Bank Cuts Interest Rate Again

BRASMLIA, Dec 1 (UrduPoint / Pakistan Point News - 01st Dec, 2016 ) - Brazil's central bank cut its key interest rate Wednesday for the second month running, as data showed that the recession hitting Latin America's largest economy continued into the third quarter.

The central bank lowered the benchmark Selic rate by a quarter of a percentage point, to 13.75 percent -- still one of the world's highest. "The available evidence indicates the pick-up in economic activity may be later and more gradual than previously anticipated," the bank said.

Earlier, the state statistics office said the ailing economy shrank a further 0.8 percent last quarter -- its seventh consecutive contraction. Brazil's economy is in its deepest recession for decades and the country's credit rating has been reduced to junk status by all three main international rating agencies.

Center-right President Michel Temer, who took over this year after the impeachment of leftist leader Dilma Rousseff, has vowed to introduce strong austerity measures. The market hopes the reforms will get the economy back on the rails, but the bank remains caught between wanting to stimulate economic growth and trying to dampen double-digit inflation.

Inflation dropped to 7.87 percent in October from 8.48 percent in September, continuing its downward progress. But it is still far above the target of 4.5 percent. Last month the bank made its first interest rate cut in three years, lowering the Selic by 0.

25 points to 14 percent.

Economists say its room to maneuver is limited. The new 0.25-point cut was in line with analysts' expectations. The bank said external factors were making it difficult to rein in inflation. A long-feared and now apparently imminent interest rate hike in the United States would strengthen the Dollar against the Brazilian real.

And billionaire Donald Trump's victory in the US presidential election has unleashed "uncertainty about the direction of economic policy," the bank said. Also restraining the bank is uncertainty about the future of Temer's austerity plan.

On Tuesday, the senate passed the first key measure, a 20-year spending freeze, against a backdrop of violent protests. Even more controversial measures -- including pension reforms -- have yet to be debated.

Meanwhile, unemployment remained stuck at 11.8 percent between August and October. Temer faces a huge task to wrestle Brazil back into the black. The economy shrank 3.8 percent in 2015 and market estimates are pointing to another slip, of almost 3.5 percent in 2016, with weak growth returning next year.

Brazil has been hit hard by falling world commodity prices, the bitter political struggle that led to Rousseff's impeachment, and a vast corruption scandal at state oil giant Petrobras. Temer has warned of state "bankruptcy" if the country does not impose painful reforms.